The costs of automation and AI are becoming known

The John Henry of the 21st century will be the legions of workers losing their jobs to robots.

Before there were urban legends, there were American folklore legends. And while many of them have been forgotten, some strongly etched characters like John Henry are still an important part of Americana.

According to the legend, John Henry was a “steel drivin’ man” who worked for the railroad, carving tunnels through any solid rock that blocked the way. He used a sledgehammer to drive a hard steel drill into a rock wall so that an explosive charge could be inserted. When the charges were detonated, the rock wall would crumble and the tunneling could progress.

As the legend tells us, one day a salesman showed up at the worksite, selling a steam-powered drill that would replace all of the steel drivers. John Henry, as the best of them, issued a challenge to the salesman and his steam driver and it was quickly accepted. The stage was set for a classic duel, man vs. machine.

The contest went on all of one day and into the next. And at the end, John Henry was the clear winner. Sadly, though, he died shortly after from his exertions.

We are today engaged in a duel with a machine technology that involves not just a single champion like the legendary John Henry but all of us.

In the latest Economic Letter, researchers Silvain Leduc and Zheng Liu at the Federal Reserve Bank of San Francisco reported on this conflict in an Economic Letter entitled, “Are Workers Losing to Robots”? They conclude that that the answer is “yes.”

Of course, since it’s economics, we’ll have to define losing and winning. In this case, the researchers focused on labor share as the defining indicator. Labor share is the proportion of national income that ends up in labor’s hands, and, over the past 20 years, the authors note that the labor share “… has declined from about 63% in 2000 to 56% in 2018.” It is interesting that the 63% labor share in 2000 had been unchanged for the previous 15 years. Something happened in 2000, but economic research has not been able to pin down exactly what that change was.

The authors believe that automation is the most likely suspect for causing the change. Automation allows the substitution of capital for labor and increases labor productivity. The reason for the increase is in the arithmetic of how productivity is calculated: Labor productivity equals output divided by units of labor; for example, hours worked.

What the authors found, though, is that while it increased productivity, “the threat of automation has also weakened workers’ bargaining power in wage negotiations and led to stagnant wage growth.”

This is a possible explanation of why wages did not increase as the U.S. economy recovered from the Great Recession in 2008, or even as the economy expanded rapidly beginning in 2017. Up until now, most economists attributed the wage sluggishness to our difficulties in calculating or even estimating the total size of the labor force — including potential workers as well as those currently working or seeking work.

The workforce size was also complicated by the influx of record numbers of immigrants, who arrived legally and illegally, that took place over the past two decades. Some economists believe they had an impact on labor supply and tended to keep wage levels down.

The stagnation of wages and labor share have already been the subject of much economic analysis and speculation. As a result, the findings in this most recent report on automation’s effect on wages has to share space in the list of causes – along with lackluster post-recession economic growth, immigration and the reduced influence of labor unions on overall wage growth.

The threat to labor of automation is very real. Just in this past week we have seen machines, controlled by Artificial Intelligence, moving into jobs that have traditionally been held by humans. A Seattle company, Picnic, has developed an AI-driven system for making pizzas untouched by human hands. A Houston firm has invented a similar system to make salads. And UPS has now received approval from the FAA for drone flights to deliver supplies to medical campuses across the country.

Adam Smith, the father of economics, observed in 1776 that the prime mover of productivity and economic growth was what he called the “Division of Labor”— dividing work into more efficient specialized functions. Ever since then we have been trying to figure out its impact on labor and on the total economy. Division of Labor has morphed into automation, and now that is morphing into robots. Finding by finding, analysis by analysis, thought by thought, we are making progress in understanding it.

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